BILL NUMBER: AB 511	CHAPTERED  07/10/00

	CHAPTER   107
	FILED WITH SECRETARY OF STATE   JULY 10, 2000
	APPROVED BY GOVERNOR   JULY 7, 2000
	PASSED THE SENATE   JUNE 29, 2000
	PASSED THE ASSEMBLY   JUNE 29, 2000
	AMENDED IN SENATE   JUNE 29, 2000
	AMENDED IN ASSEMBLY   JUNE 1, 1999
	AMENDED IN ASSEMBLY   APRIL 26, 1999

INTRODUCED BY   Assembly Members Alquist, Correa, Cunneen, Florez,
Honda, Lempert, Leonard, Machado, Nakano, Scott, and Torlakson
   (Coauthors:  Senators Alarcon, Alpert, Chesbro, Costa, Figueroa,
Karnette, McPherson, Murray, O'Connell, Rainey, Schiff, Sher, Solis,
Soto, and Vasconcellos)

                        FEBRUARY 18, 1999

   An act to amend Sections 10754.2, 17052.12, 17151, 17276, 23609,
and 24416 of, to add Section 10903 to, and to add and repeal Sections
6378.1 and 17053.80 of, the Revenue and Taxation Code, relating to
taxation, and making an appropriation therefor, to take effect
immediately, tax levy.



	LEGISLATIVE COUNSEL'S DIGEST


   AB 511, Alquist.  Taxation.
   The Sales and Use Tax Law provides various exemptions from that
tax. Existing law authorizes cities, counties, and cities and
counties to impose local sales and use taxes or transactions and use
taxes, and provides that exemptions from state sales and use tax are
incorporated into those local taxes.
   This bill would, on or after January 1, 2001, and before January
1, 2006, additionally exempt tangible personal property purchased by
eligible entities, as defined, that locate or expand a business in a
California county with a specified unemployment rate and that qualify
for receiving this Rural Investment Tax exemption by the California
Infrastructure and Economic Development Bank (CIEDB) board.
   The Vehicle License Fee (VLF) Law establishes, in lieu of any ad
valorem property tax upon vehicles, an annual license fee for any
vehicle subject to registration in this state in the amount of 2% of
the market value of that vehicle, as specified.  The VLF law
permanently offsets the amount of the vehicle license fee for each
subject vehicle by 25% and, for vehicle license fees with a final due
date in the 2000 calendar year, offsets the fee amount for each
subject vehicle by 35%.  The VLF law also provides, depending upon
factors that include whether forecasted General Fund revenues for
certain fiscal years are within certain revenue target ranges, for a
superseding offset percentage of 35%, 46.5%, 55%, or 67.5% to apply
to specified future calendar years.  The VLF law requires the
Department of Finance, in any of certain fiscal years for which that
department estimates a cumulative General Fund reduction of more than
$100,000,000 as a result of state tax law changes on or after
January 1, 1999, to apply that cumulative reduction, in accordance
with specified formulas, to reduce target revenue ranges and to
proportionately reduce the percentage amounts of superseding vehicle
license fee offsets.
   As amended by AB 858, the Vehicle License Fee Law provides for a
minimum vehicle license fee offset of 35% in 2001 and 2002, an
additional offset in those same years that results in a combined
offset of 67.5%, and a single vehicle license fee offset of 67.5% for
2003 and each year thereafter.
   This bill would appropriate the sum of $2,052,000,000 for transfer
to a newly created special fund for payment by the Controller, as
provided, of additional vehicle license fee offsets for the 2000-01
and 2001-02 fiscal years.  This bill would also authorize the
Governor to direct the Controller to send a notice, as provided, with
each payment of an additional vehicle license fee offset.  This bill
would make changes to clarify the amendments made to the Vehicle
License Fee Law by AB 858, and would require the Department of Motor
Vehicles to report monthly and year-to-date dollars amounts to the
Controller with respect to the additional vehicle license fee
offsets.
   The Personal Income Tax Law authorizes various credits against the
taxes imposed by that law.
   This bill would, for each taxable year beginning on or after
January 1, 2000, and before January 1, 2005, allow a credit in an
amount equal to $500 multiplied by the number of applicable
individuals with respect to whom the taxpayer is an eligible
caregiver for the taxable year.
   The Personal Income Tax Law and the Bank and Corporation Tax Law,
by reference to a specified federal statute, allow a credit against
taxes imposed by those laws for increasing research expenses, as
defined.  In general, the amount of the credit under both laws is
equal to 12% of the excess of the qualified research expenses, as
defined, for the taxable or income year over the base amount and, in
addition, for purposes of the Bank and Corporation Tax Law, 24% of
the basic research payments, as defined.  The term "base amount"
means the product of the average annual gross receipts of the
taxpayer for each of the specified years preceding the taxable or
income year and the fixed-base percentage, as defined, but in no
event less than 50% of the qualified research expenses for the
taxable or income year.  Existing law permits, for taxable and income
years beginning on or after January 1, 1998, a taxpayer to elect an
alternative incremental credit, based on a specified formula.
   This bill would, under both laws, for each taxable or income year
beginning on or after January 1, 2000, provide that the credit for
increasing research expenses shall be equal to 15% of the qualified
research expenses.  This bill would also revise that formula by
changing certain state modifications to the federal formula to
increase the amount of the alternative incremental credit allowed
under state law, as provided.
   The Personal Income Tax Law provides for an exclusion from the
gross income of an employee with respect to the taxes imposed by that
law for amounts paid or incurred by an employer for educational
assistance to the employee, as specified, up to $5,250 during a
calendar year.  However, educational assistance does not include any
course or education taken at the graduate level beginning after June
30, 1996, of a kind normally taken by an individual pursuing a
program leading to a law, business, medical, or other advanced
academic or professional degree.
   This bill would remove that exception for any course or education
taken at the graduate level beginning after January 1, 2000, thereby
including those courses or education within the definition of
educational assistance.
   The Personal Income Tax Law and the Bank and Corporation Tax Law
authorize a net operating loss deduction against the taxes imposed by
those laws that generally permits those losses to be carried forward
5 taxable or income years, as specified, but provides that 50% of
the entire amount of the net operating loss for any taxable or income
year is not eligible for carryover to any subsequent taxable or
income year, except as specified.
   This bill would, for each taxable or income year beginning on or
after January 1, 2000, and before January 1, 2002, allow 55% of the
entire amount of net operating loss to be carried forward; for each
taxable or income year beginning on or after January 1, 2002, and
before January 1, 2004, would allow 60% of the entire amount of net
operating loss to be carried forward; and for each taxable or income
year beginning on or after January 1, 2004, would allow 65% of the
entire amount of the net operating loss to be carried forward.  This
bill would also provide that a net operating loss attributable to any
taxable or income year beginning on or after January 1, 2000, shall
be a net operating loss to each of the 10 taxable or income years
following the taxable or income year of the loss.
   This bill would take effect immediately as a tax levy, but the
operation of certain of its provisions would depend upon the
enactment of another bill.
   Appropriation:  yes.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:


  SECTION 1.  Section 6378.1 is added to the Revenue and Taxation
Code, to read:
   6378.1.  (a) On and after January 1, 2001, and before January 1,
2006, there are exempted from the taxes imposed by this part, the
gross receipts from the sale in this state of, and the storage, use,
or other consumption in this state of, tangible personal property
purchased by eligible entities, as defined in subdivision (f).
   (b) The exemption provided under this part shall be termed the
Rural Investment Tax exemption.
   (c) The California Infrastructure and Economic Development Bank
(CIEDB) board shall develop a program that determines who is eligible
to receive this exemption, monitor entities for compliance with the
requirements of this section, and notify the State Board of
Equalization, as provided in this section.  The CIEDB shall determine
the amount of the exemption available to each entity.
   (d) Entities wishing to qualify for this exemption shall apply to
the CIEDB board in a manner prescribed by the CIEDB board.  The CIEDB
board shall provide all applicants written notification stating the
eligibility of the applicant to receive an exemption under this
section.
   (e) The annual amount of exemptions that may be granted pursuant
to this section shall not exceed five million dollars ($5,000,000)
per year.  The CIEDB board shall not authorize any exemption that
would cause the total amount of exemptions authorized with respect to
any calendar year under this section to exceed five million dollars
($5,000,000).
   (f) For purposes of this section:
   (1) "Eligible entity" means an entity that complies with all of
the following:
   (A) The entity shall locate or expand a business in a California
county with an average annual unemployment rate of five percentage
points or more above the statewide average for the most recent
calendar year as determined by the State of California, Employment
Development Department.
   (B) The entity shall make a new investment of at least one hundred
fifty million dollars ($150,000,000) in the county in which the
entity locates its business and shall maintain this level of
investment for a period of at least 24 months after the CIEDB board
certifies that the entity has become an eligible entity.
   (C) The entity shall employ at least 500 new full-time equivalent
employees in the county, including employees who are employed
directly by the entity and employees who are hired by supporting
industries.  Employees shall be employed for at least 24 months after
the CIEDB certifies that the entity has become eligible.  At least
175 of the new full-time equivalent employees shall be directly
employed by the entity.
   (2) "New full-time equivalent employees" means employees hired by
the entity seeking the exemption allowed under this part and not
employees moved, transferred, or displaced from other places of
business of the entity within this state.
   (3) "Tangible personal property" means machinery and equipment,
including component parts.
   (4) "Tangible personal property" does not include any of the
following:
   (A) Tangible personal property that is used primarily in
administration, general management, or marketing.
   (B) Furniture, inventory, or equipment used to store products.
   (C) Any property for which a credit is claimed under either
Section 17053.49 or 23649 of the Revenue and Taxation Code.
   (g) Prior to claiming an exemption under this section, the
eligible entity shall apply to the State Board of Equalization for an
exemption certificate and shall include a copy of the written
notification from the CIEDB board stating that the entity applying
for the exemption certificate is eligible to receive an exemption
under this section.  No exemption shall be allowed under this section
unless the eligible entity furnishes the retailer with an exemption
certificate, completed in accordance with any instruction or
regulations as the State Board of Equalization may prescribe, and the
retailer subsequently furnishes the board with a copy of the
exemption certificate.  The exemption certificate shall contain the
sales price of the machinery and equipment that is exempt pursuant to
subdivision (a).
   (h) (1) Notwithstanding any provision of the Bradley-Burns Uniform
Local Sales and Use Tax Law (Part 1.5 (commencing with Section
7200)) or the Transactions and Use Tax Law (Part 1.6 (commencing with
Section 7251)), the exemption established by this section shall not
apply with respect to any tax levied by a county, city, or district
pursuant to, or in accordance with, either of these laws.
   (2) The exemption established by this section shall not apply with
respect to any tax levied pursuant to Sections 6051.2 and 6201.2, or
pursuant to Section 35 of Article XIII of the California
Constitution.
   (3) The exemption established by this section shall not apply to
any sale or use of property that, within one year from the date of
purchase, is either removed from a California county as described in
subparagraph (A) of paragraph (1) of subdivision (f), or converted
from an exempt use under subdivision (a) to some other use not
qualifying for the exemption.
   (i) (1) If a purchaser certifies in writing to the seller that the
property purchased without payment of the tax will be used in a
manner entitling the seller to regard the gross receipts from the
sale as exempt from the sales tax, and within one year from the date
of purchase, the purchaser (1) removes that property outside a
California county as described in subparagraph (A) of paragraph (1)
of subdivision (f), or (2) converts that property for use in a manner
not qualifying for the exemption, the purchaser shall be liable for
payment of sales tax, with applicable interest, as if the purchaser
were a retailer making a retail sale of the property at the time the
property is so removed, converted, or used, and the sales price of
the property to the purchaser shall be deemed the gross receipts from
that retail sale.
   (2) The purchaser shall be liable for payment of sales tax, with
applicable interest, as if the purchaser were a retailer making a
retail sale of the property if the purchaser does not achieve the
level and duration of employment and investment pursuant to
subdivision (f) within three years from the date the entity first
uses an exemption under this section.  The CIEDB board may extend
this time period by a maximum of 12 months for reasonable cause.
   (j) (1) The CIEDB board shall determine if entities have fulfilled
the requirements necessary in order to keep this exemption and shall
report to the State Board of Equalization on entities that have not
fulfilled these requirements.
   (2) Notwithstanding Section 6902, the State Board of Equalization
shall, within one year after being notified by the CIEDB board that
an entity has not fulfilled the requirements of this section, examine
the books and records of the entity, and issue a determination of
any liabilities due.
   (k) The CIEDB board shall provide a report to the Legislature, the
Department of Finance, and the State Board of Equalization no later
than January 15 following each fiscal year the program is in
operation.  The report shall include, at a minimum, all of the
following:
   (1) The entities that have been provided the exemption established
by this section and the amount of the exemption authorized by the
CIEDB board to each entity.
   (2) The number of new persons employed by each entity.
   (3) The amount of investment made by each entity.
   (4) A description of the economic development provided by each
entity receiving the exemption.
   (5) A description of each entity that has fulfilled the
requirements of paragraph (1) of subdivision (f).
   (6) A description of each entity that has not fulfilled the
requirements of paragraph (1) of subdivision (f).
   (l) (1) This section shall become operative on the first day of
the first calendar quarter commencing more than 90 days after the
effective date of this act.
   (2) This section shall remain in effect only until January 1,
2006, and as of that date is repealed.
  SEC. 2.  Section 10754.2 of the Revenue and Taxation Code, as added
by AB 858 of the 1999-2000 Regular Session, is amended to read:
   10754.2.  Notwithstanding any other provision of law to the
contrary, all of the following apply to vehicle license fees with a
final due date on or after January 1, 2001:
   (a) (1) For each vehicle license fee for the initial or original
registration of any vehicle, never before registered in this state,
or for any renewal of registration, with a final due date in 2001 or
2002, for which the vehicle license fee offset required by Section
10754 is less than 67 1/2 percent, the Department of Motor Vehicles
shall concurrently calculate an offset, in addition to the offset
required by Section 10754, that is equal to the difference between
the following:
   (A) A vehicle license fee offset of 67 1/2 percent.
   (B) A vehicle license fee offset of the greater of 35 percent or
that percentage required by Section 10754.
   (2) The Department of Motor Vehicles shall, for each calendar
month, report to the Department of Finance and the Controller the
amount of each offset calculated pursuant to paragraph (1) for that
calendar month and the name and address of the taxpayer to whom that
additional offset applies.  The Controller shall, within 30 days
after receiving a monthly report from the Department of Motor
Vehicles, make payment of the reported additional offsets to the
identified taxpayers.  The Governor may direct the Controller to
include, with each payment pursuant to this paragraph of an
additional vehicle license fee offset, a notice stating that the
additional vehicle license fee offsets required by this paragraph
constitute a Prosperity Dividend approved by the Legislature and
signed by Governor Davis.
   (3) (A) For each vehicle license fee, for the initial or original
registration of any vehicle, never before registered in this state,
or for any renewal of registration, with a final due date in 2001 or
2002, the vehicle license fee offset implemented pursuant to Section
10754 shall be not less than 35 percent.
   (B) For each vehicle license fee, for the initial or original
registration of any vehicle, never before registered in this state,
or for any renewal of registration with a final due date in 2003 or
any calendar year thereafter, there shall be a 671/2 percent offset
as described in paragraph (5) of subdivision (a) of Section 10754, as
that section read on January 1, 2000.  In no event may the 671/2
percent offset established by this subparagraph be reduced pursuant
to paragraph (4) of subdivision (c) of Section 10754, or any
successor to that paragraph.
   (b) (1) The additional vehicle license fee offsets established by
subdivision (a) shall be funded from those amounts to be appropriated
by statute.
   (2) Revenue losses to cities, counties, and cities and counties
resulting from this section shall be reimbursed by the Controller
from the General Fund in the same manner as provided in Section
11000.  The amounts of General Fund transfers required by this
subdivision are deemed to be vehicle license fee proceeds and vehicle
license fee revenues for those same purposes as set forth in
subdivision (d) of Section 11000, and are subject to the same
pledges, liens, encumbrances, and priorities as described in that
subdivision.
  SEC. 3.  Section 10903 is added to the Revenue and Taxation Code,
to read:
   10903.  (a) Notwithstanding Section 13340 of the Government Code,
there is hereby appropriated from the General Fund the sum of two
billion fifty-two million dollars ($2,052,000,000) for transfer by
the Controller, upon notification by the Director of Finance during
the 2000-01 fiscal year, to the Special Reserve Fund for Vehicle
License Fee Tax Relief, which is hereby created as a special fund.
The amounts appropriated by this subdivision for transfer to the
Special Reserve Fund for Vehicle License Fee Tax Relief shall be
expended exclusively for the payment of additional vehicle license
fee offsets calculated under Section 10754.2, and are allocated for
that purpose as follows:
   (1) Eight hundred and eighty-seven million dollars ($887,000,000)
for the payment of additional vehicle license fee offsets for the
2000-01 fiscal year.
   (2) One billion one hundred sixty five million dollars
($1,165,000,000) for the payment of additional vehicle license fee
offsets for the 2001-02 fiscal year.
   (b) The Department of Motor Vehicles shall provide both of the
following notices to the Controller in connection with each monthly
report pursuant to Section 10754.2 of additional vehicle license fee
offsets calculated by that department pursuant to that section:
   (1) A notice for each month of the total dollar amount of the
additional vehicle license fee offsets calculated by the department
during that month pursuant to Section 10754.2.
   (2) A notice of the total dollar amount of the additional vehicle
license fee offsets calculated by the department pursuant to Section
10754.2 for the calendar year to the date of each monthly report
provided pursuant to Section 10754.2.
  SEC. 4.  Section 17052.12 of the Revenue and Taxation Code is
amended to read:
   17052.12.  For each taxable year beginning on or after January 1,
1987, there shall be allowed as a credit against the "net tax" (as
defined by Section 17039) for the taxable year an amount determined
in accordance with Section 41 of the Internal Revenue Code, except as
follows:
   (a) For each taxable year beginning before January 1, 1997, the
reference to "20 percent" in Section 41(a)(1) of the Internal Revenue
Code is modified to read "8 percent."
   (b) (1) For each taxable year beginning on or after January 1,
1997, and before January 1, 1999, the reference to "20 percent" in
Section 41(a)(1) of the Internal Revenue Code is modified to read "11
percent."
   (2) For each taxable year beginning on or after January 1, 1999,
and before January 1, 2000, the reference to "20 percent" in Section
41(a)(1) of the Internal Revenue Code is modified to read "12
percent."
   (3) For each taxable year beginning on or after January 1, 2000,
the reference to "20 percent" in Section 41(a)(1) of the Internal
Revenue Code is modified to read "15 percent."
   (c) Section 41(a)(2) of the Internal Revenue Code, relating to
basic research payments, shall not apply.
   (d) "Qualified research" shall include only research conducted in
California.
   (e) In the case where the credit allowed under this section
exceeds the "net tax," the excess may be carried over to reduce the
"net tax" in the following year, and succeeding years if necessary,
until the credit has been exhausted.
   (f) (1) With respect to any expense paid or incurred after the
operative date of Section 6378, Section 41(b)(1) of the Internal
Revenue Code is modified to exclude from the definition of "qualified
research expense" any amount paid or incurred for tangible personal
property that is eligible for the exemption from sales or use tax
provided by Section 6378.
   (2) For each taxable year beginning on or after January 1, 1998,
the reference to "Section 501(a)" in Section 41(b)(3)(C) of the
Internal Revenue Code, relating to contract research expenses, is
modified to read "this part or Part 11 (commencing with Section
23001)."
   (g) (1) For each taxable year beginning on or after January 1,
1998, and before January 1, 2000:
   (A) The reference to "1.65 percent" in Section 41(c)(4)(A)(i) of
the Internal Revenue Code is modified to read "one and thirty-two
hundredths of one percent."
   (B) The reference to "2.2 percent" in Section 41(c)(4)(A)(ii) of
the Internal Revenue Code is modified to read "one and seventy-six
hundredths of one percent."
   (C) The reference to "2.75 percent" in Section 41(c)(4)(A)(iii) of
the Internal Revenue Code is modified to read "two and two-tenths of
one percent."
   (2) For each taxable year beginning on or after January 1, 2000:
   (A) The reference to "1.65 percent" in Section 41(c)(4)(A)(i) of
the Internal Revenue Code is modified to read "one and forty-nine
hundredths of one percent."
   (B) The reference to "2.2 percent" in Section 41(c)(4)(A)(ii) of
the Internal Revenue Code is modified to read "one and ninety-eight
hundredths of one percent."
   (C) The reference to "2.75 percent" in Section 41(c)(4)(A)(iii) of
the Internal Revenue Code is modified to read "two and forty-eight
hundredths of one percent."
   (3) Section 41(c)(4)(B) shall not apply and in lieu thereof an
election under Section 41(c)(4)(A) of the Internal Revenue Code may
be made for any taxable year of the taxpayer beginning on or after
January 1, 1998.  That election shall apply to the taxable year for
which made and all succeeding taxable years unless revoked with the
consent of the Franchise Tax Board.
   (4) Section 41(c)(6) of the Internal Revenue Code, relating to
gross receipts, is modified to take into account only those gross
receipts from the sale of property held primarily for sale to
customers in the ordinary course of the taxpayer's trade or business
that is delivered or shipped to a purchaser within this state,
regardless of f.o.b. point or any other condition of the sale.
   (h) Section 41(h) of the Internal Revenue Code, relating to
termination, shall not apply.
   (i) Section 41(g) of the Internal Revenue Code, relating to
special rule for passthrough of credit, is modified by each of the
following:
   (1) The last sentence shall not apply.
   (2) If the amount determined under Section 41(a) of the Internal
Revenue Code for any taxable year exceeds the limitation of Section
41(g) of the Internal Revenue Code, that amount may be carried over
to other taxable years under the rules of subdivision (e); except
that the limitation of Section 41(g) of the Internal Revenue Code
shall be taken into account in each subsequent taxable year.
  SEC. 5.  Section 17053.80 is added to the Revenue and Taxation
Code, to read:
   17053.80.  (a) For each taxable year beginning on or after January
1, 2000, and before January 1, 2005, there shall be allowed as a
credit against the "net tax," as defined in Section 17039, an amount
equal to five hundred dollars ($500) multiplied by the number of
applicable individuals with respect to whom the taxpayer is an
eligible caregiver for the taxable year.
   (b) (1) (A) "Applicable individual" means, with respect to any
taxable year, any individual who has been certified, before the due
date for filing the return of tax for the taxable year (without
extensions), by a physician (as defined in Section 1861(r)(1) of the
Social Security Act) as being an individual with long-term care needs
described in subparagraph (B) for a period--
   (i) which is at least 180 consecutive days, and
   (ii) a portion of which occurs within the taxable year.
   That term shall not include any individual otherwise meeting the
requirements of the preceding sentence unless within the 391/2 month
period ending on that due date (or such other period as the Franchise
Tax Board prescribes) a physician (as so defined) has certified that
that individual meets those requirements.
   (B) An individual is described in this subparagraph if the
individual meets any of the following requirements:
   (i) The individual is at least six years of age and--
   (I) is unable to perform (without substantial assistance from
another individual) at least three activities of daily living, as
defined in Section 7702B(c)(2)(B) of the Internal Revenue Code, due
to a loss of functional capacity, or
   (II) requires substantial supervision to protect that individual
from threats to health and safety due to severe cognitive impairment
and is unable to perform at least one activity of daily living, as
defined in Section 7702B(c)(2)(B) of the Internal Revenue Code, or to
the extent provided by the Franchise Tax Board (in consultation with
the Secretary of Health and Welfare Agency), is unable to engage in
age appropriate activities.
   (ii) The individual is at least two years of age but less than six
years of age and is unable due to a loss of functional capacity to
perform (without substantial assistance from another individual) at
least two of the following activities:  eating, transferring, or
mobility.
   (iii) The individual is under two years of age and requires
specific durable medical equipment by reason of a severe health
condition or requires a skilled practitioner trained to address the
individual's condition to be available if the individual's parents or
guardians are absent.
   (2) (A) A taxpayer shall be treated as an "eligible caregiver" for
any taxable year with respect to the following individuals:
   (i) The taxpayer.
   (ii) The taxpayer's spouse.
   (iii) An individual with respect to whom the taxpayer is allowed a
credit under subdivision (d) of Section 17054 for the taxable year.

   (iv) An individual who would be described in clause (iii) for the
taxable year if Section 151(c)(1)(A) of the Internal Revenue Code,
relating to gross income limitation, were applied by substituting for
the federal exemption amount specified in that section, an amount
equal to the sum of the federal exemption amount specified in that
section, the federal standard deduction under Section 63(c)(2)(C) of
the Internal Revenue Code, and any additional federal standard
deduction under Section 63(c)(3) of the Internal Revenue Code which
would be applicable to the individual if clause (iii) applied.
   (v) An individual who would be described in clause (iii) for the
taxable year if--
   (I) the requirements of clause (iv) are met with respect to the
individual, and
   (II) the requirements of subparagraph (B) are met with respect to
the individual in lieu of the support test of Section 152(a) of the
Internal Revenue Code.
   (B) The requirements of this subparagraph are met if an individual
has as his or her principal place of abode the home of the taxpayer,
and
   (i) in the case of an individual who is an ancestor or descendant
of the taxpayer or the taxpayer's spouse, is a member of the taxpayer'
s household for over half the taxable year, or
   (ii) in the case of any other individual, is a member of the
taxpayer's household for the entire taxable year.
   (C) (i) If more than one individual is an eligible caregiver with
respect to the same applicable individual for taxable years ending
with or within the same calendar year, a taxpayer shall be treated as
the eligible caregiver if each of those individuals (other than the
taxpayer) files a written declaration (in the form and manner as the
Franchise Tax Board may prescribe) that that individual will not
claim that applicable individual for the credit under this section.
   (ii) If each individual required under clause (i) to file a
written declaration under clause (i) does not do so, the individual
with the highest federal modified adjusted gross income (as defined
in Section 32(c)(5) of the Internal Revenue Code for federal
purposes) shall be treated as the eligible caregiver.
   (iii) In the case of married individuals filing separate returns,
the determination under this subparagraph as to whether the husband
or wife is the eligible caregiver shall be made under the rules of
clause (ii) (whether or not one of them has filed a written
declaration under clause (i)).
   (c) (1) No credit shall be allowed under this section to a
taxpayer with respect to any applicable individual unless the
taxpayer includes the name and taxpayer identification number of that
individual, and the identification number of the physician
certifying that individual, on the return of tax for the taxable
year.
   (2) The denial of any credit under paragraph (1) may be made
pursuant to Section 19051.
   (d) The taxpayer shall retain the physician certification required
by subdivision (b) and shall make that certification available to
the Franchise Tax Board upon request.
   (e) No credit shall be allowed under this section for any eligible
caregiver whose adjusted gross income for the taxable year is equal
to or greater than one hundred thousand dollars ($100,000).
   (f) This section shall remain in effect only until December 1,
2005, and as of that date is repealed.
  SEC. 6.  Section 17151 of the Revenue and Taxation Code is amended
to read:
   17151.  (a) Gross income of an employee does not include any
amounts, not exceeding an aggregate amount of five thousand two
hundred fifty dollars ($5,250) per calendar year, that is paid or
incurred by the employer for educational assistance to the employee
pursuant to an educational assistance program.
   (b) For purposes of this section, the following definitions shall
apply:
   (1) "Educational assistance" means the payment by an employer of
expenses incurred by or on behalf of an employee for the employee's
education, and includes, but is not limited to, payments for books,
supplies, equipment, tuition, and fees, and similar payments.
"Educational assistance" includes the provision by an employer of
courses of instruction for an employee, including the provision of
books, supplies, and equipment.  "Educational assistance" does not
include any payment for, or the provision of, any of the following:
   (A) Any tools or supplies that may be retained by the employee
after completion of a course of instruction.
   (B) Any meals, lodging, or transportation.
   (C) Any course or education involving sports, games, or hobbies.
   (D) Any course or education taken at the graduate level of a kind
normally taken by an individual pursuing a program leading to a law,
business, medical, or other advanced academic or professional degree.
  This subparagraph applies only to any course or education taken at
the graduate level beginning after June 30, 1996, and before January
1, 2000.
   (2) "Educational assistance program" means a separate written plan
of an employer for the exclusive benefit of his or her employees to
provide those employees with educational assistance.  The program
shall meet the following requirements:
   (A) The program benefits employees who qualify under a
classification established by the employer and found by the Franchise
Tax Board not to be discriminatory in favor of employees who are
highly compensated employees (within the meaning of Section 414(q) of
the Internal Revenue Code) or their dependents.  For purposes of
this subparagraph, there shall be excluded from consideration
employees who are not included in the program and who are included in
a unit of employees covered by an agreement that the Franchise Tax
Board finds to be a collective bargaining agreement between employee
                                                  representatives and
one or more employers, if there is evidence that educational
assistance benefits were the subject of good faith bargaining between
the employee representatives and the employer or employers.
   (B) Not more than 5 percent of the amounts paid or incurred by the
employer for educational assistance during the year may be provided
for the class of individuals who are owners (or their spouses or
dependents), each of whom, on any day of the year, owns more than 5
percent of the capital or profits interest in the employer.
   (C) The program does not provide eligible employees with a choice
between educational assistance and other remuneration includable in
gross income.  For purposes of this section, the business practices
of the employer, as well as the written program, shall be taken into
account.
   (D) The program need not be funded.
   (E) Reasonable notification of the availability and terms of the
program is provided to eligible employees.
   (3) "Employee" includes self-employed individuals within the
meaning of Section 401(c)(1) of the Internal Revenue Code.
   (c) For purposes of this section:
   (1) Any individual who owns the entire interest in an
unincorporated trade or business shall be treated as his or her own
employee.
   (2) A partnership shall be treated as the employer of each partner
who is an employee within the meaning of paragraph (3) of
subdivision (b).
   (3) (A) An educational assistance program shall not be considered
to fail to meet any of the requirements of paragraph (2) of
subdivision (b) on the sole basis of either of the following:
   (i) Different utilization rates for the different types of
educational assistance made available under the program.
   (ii) Successful completion or attainment of a particular course
grade is required for or considered in determining reimbursement
under the program.
   (B) This section shall not be construed to affect the deduction or
inclusion in income of amounts that are paid or incurred or received
as reimbursement for educational expenses under Section 117, 162, or
212 of the Internal Revenue Code.
   (d) No deduction or credit shall be allowed to the employee with
respect to any amount that the employee excludes from income pursuant
to this section.
   (e) Section 127 of the Internal Revenue Code shall not apply.
   (f) This section shall apply with respect to expenses relating to
courses beginning after June 30, 1996.
  SEC. 7.  Section 17276 of the Revenue and Taxation Code is amended
to read:
   17276.  Except as provided in Sections 17276.1, 17276.2, 17276.4,
17276.5, and 17276.6, the deduction provided by Section 172 of the
Internal Revenue Code, relating to a net operating loss deduction,
shall be modified as follows:
   (a) (1) Net operating losses attributable to taxable years
beginning before January 1, 1987, shall not be allowed.
   (2) A net operating loss shall not be carried forward to any
taxable year beginning before January 1, 1987.
   (b) (1) Except as provided in paragraphs (2) and (3), the
provisions of Section 172(b)(2) of the Internal Revenue Code,
relating to the amount of carryovers, shall be modified so that the
applicable percentage of the entire amount of the net operating loss
for any taxable year shall be eligible for carryover to any
subsequent taxable year.  For purposes of this subdivision, the
applicable percentage shall be:
   (A) Fifty percent for any taxable year beginning before January 1,
2000.
   (B) Fifty-five percent for any taxable year beginning on or after
January 1, 2000, and before January 1, 2002.
   (C) Sixty percent for any taxable year beginning on or after
January 1, 2002, and before January 1, 2004.
   (D) Sixty-five percent for any taxable year beginning on or after
January 1, 2004.
   (2) In the case of a taxpayer who has a net operating loss in any
taxable year beginning on or after January 1, 1994, and who operates
a new business during that taxable year, each of the following shall
apply to each loss incurred during the first three taxable years of
operating the new business:
   (A) If the net operating loss is equal to or less than the net
loss from the new business, 100 percent of the net operating loss
shall be carried forward as provided in subdivision (d).
   (B) If the net operating loss is greater than the net loss from
the new business, the net operating loss shall be carried over as
follows:
   (i) With respect to an amount equal to the net loss from the new
business, 100 percent of that amount shall be carried forward as
provided in subdivision (d).
   (ii) With respect to the portion of the net operating loss which
exceeds the net loss from the new business, the applicable percentage
of that amount shall be carried forward as provided in subdivision
(d).
   (C) For purposes of Section 172(b)(2) of the Internal Revenue
Code, the amount described in clause (ii) of subparagraph (B) shall
be absorbed before the amount described in clause (i) of subparagraph
(B).
   (3) In the case of a taxpayer who has a net operating loss in any
taxable year beginning on or after January 1, 1994, and who operates
an eligible small business during that taxable year, each of the
following shall apply:
   (A) If the net operating loss is equal to or less than the net
loss from the eligible small business, 100 percent of the net
operating loss shall be carried forward to the taxable years
specified in subdivision (d).
   (B) If the net operating loss is greater than the net loss from
the eligible small business, the net operating loss shall be carried
over as follows:
   (i) With respect to an amount equal to the net loss from the
eligible small business, 100 percent of that amount shall be carried
forward as provided in subdivision (d).
   (ii) With respect to that portion of the net operating loss that
exceeds the net loss from the eligible small business, the applicable
percentage of that amount shall be carried forward as provided in
subdivision (d).
   (C) For purposes of Section 172(b)(2) of the Internal Revenue
Code, the amount described in clause (ii) of subparagraph (B) shall
be absorbed before the amount described in clause (i) of subparagraph
(B).
   (4) In the case of a taxpayer who has a net operating loss in a
taxable year beginning on or after January 1, 1994, and who operates
a business that qualifies as both a new business and an eligible
small business under this section, that business shall be treated as
a new business for the first three taxable years of the new business.

   (5) In the case of a taxpayer who has a net operating loss in a
taxable year beginning on or after January 1, 1994, and who operates
more than one business, and more than one of those businesses
qualifies as either a new business or an eligible small business
under this section, paragraph (2) shall be applied first, except that
if there is any remaining portion of the net operating loss after
application of clause (i) of subparagraph (B) of that paragraph,
paragraph (3) shall be applied to the remaining portion of the net
operating loss as though that remaining portion of the net operating
loss constituted the entire net operating loss.
   (6) For purposes of this section, the term "net loss" means the
amount of net loss after application of Sections 465 and 469 of the
Internal Revenue Code.
   (c) Net operating loss carrybacks shall not be allowed.
   (d) (1) (A) For a net operating loss for any taxable year
beginning on or after January 1, 1987, and before January 1, 2000,
Section 172(b)(1)(A)(ii) of the Internal Revenue Code, relating to
years to which net operating losses may be carried, is modified to
substitute "five taxable years" in lieu of " 20 taxable years" except
as otherwise provided in paragraphs (2) and (3).
   (B) For a net operating loss for any taxable year beginning on or
after January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal
Revenue Code, relating to years to which net operating losses may be
carried, is modified to substitute "10 taxable years" in lieu of "20
taxable years."
   (2) For any taxable year beginning before January 1, 2000, in the
case of a "new business," the "five taxable years" in paragraph (1)
shall be modified to read as follows:
   (A) "Eight taxable years" for a net operating loss attributable to
the first taxable year of that new business.
   (B) "Seven taxable years" for a net operating loss attributable to
the second taxable year of that new business.
   (C) "Six taxable years" for a net operating loss attributable to
the third taxable year of that new business.
   (3) For any carryover of a net operating loss for which a
deduction is denied by Section 17276.3, the carryover period
specified in this subdivision shall be extended as follows:
   (A) By one year for a net operating loss attributable to taxable
years beginning in 1991.
   (B) By two years for a net operating loss attributable to taxable
years beginning prior to January 1, 1991.
   (4) The net operating loss attributable to taxable years beginning
on or after January 1, 1987, and before January 1, 1994, shall be a
net operating loss carryover to each of the 10 taxable years
following the year of the loss if it is incurred by a taxpayer that
is under the jurisdiction of the court in a Title 11 or similar case
at any time during the income year.  The loss carryover provided in
the preceding sentence shall not apply to any loss incurred after the
date the taxpayer is no longer under the jurisdiction of the court
in a Title 11 or similar case.
   (e) For purposes of this section:
   (1) "Eligible small business" means any trade or business that has
gross receipts, less returns and allowances, of less than one
million dollars ($1,000,000) during the taxable year.
   (2) Except as provided in subdivision (f), "new business" means
any trade or business activity that is first commenced in this state
on or after January 1, 1994.
   (3) "Title 11 or similar case" shall have the same meaning as in
Section 368(a)(3) of the Internal Revenue Code.
   (4) In the case of any trade or business activity conducted by a
partnership or S corporation, paragraphs (1) and (2) shall be applied
to the partnership or S corporation.
   (f) For purposes of this section, in determining whether a trade
or business activity qualifies as a new business under paragraph (2)
of subdivision (e), the following rules shall apply:
   (1) In any case where a taxpayer purchases or otherwise acquires
all or any portion of the assets of an existing trade or business
(irrespective of the form of entity) that is doing business in this
state (within the meaning of Section 23101), the trade or business
thereafter conducted by the taxpayer (or any related person) shall
not be treated as a new business if the aggregate fair market value
of the acquired assets (including real, personal, tangible, and
intangible property) used by the taxpayer (or any related person) in
the conduct of its trade or business exceeds 20 percent of the
aggregate fair market value of the total assets of the trade or
business being conducted by the taxpayer (or any related person).
For purposes of this paragraph only, the following rules shall apply:

   (A) The determination of the relative fair market values of the
acquired assets and the total assets shall be made as of the last day
of the first taxable year in which the taxpayer (or any related
person) first uses any of the acquired trade or business assets in
its business activity.
   (B) Any acquired assets that constituted property described in
Section 1221(1) of the Internal Revenue Code in the hands of the
transferor shall not be treated as assets acquired from an existing
trade or business, unless those assets also constitute property
described in Section 1221(1) of the Internal Revenue Code in the
hands of the acquiring taxpayer (or related person).
   (2) In any case where a taxpayer (or any related person) is
engaged in one or more trade or business activities in this state, or
has been engaged in one or more trade or business activities in this
state within the preceding 36 months ("prior trade or business
activity"), and thereafter commences an additional trade or business
activity in this state, the additional trade or business activity
shall only be treated as a new business if the additional trade or
business activity is classified under a different division of the
Standard Industrial Classification (SIC) Manual published by the
United States Office of Management and Budget, 1987 edition, than are
any of the taxpayer's (or any related person's) current or prior
trade or business activities.
   (3) In any case where a taxpayer, including all related persons,
is engaged in trade or business activities wholly outside of this
state and the taxpayer first commences doing business in this state
(within the meaning of Section 23101) after December 31, 1993 (other
than by purchase or other acquisition described in paragraph (1)),
the trade or business activity shall be treated as a new business
under paragraph (2) of subdivision (e).
   (4) In any case where the legal form under which a trade or
business activity is being conducted is changed, the change in form
shall be disregarded and the determination of whether the trade or
business activity is a new business shall be made by treating the
taxpayer as having purchased or otherwise acquired all or any portion
of the assets of an existing trade or business under the rules of
paragraph (1) of this subdivision.
   (5) "Related person" shall mean any person that is related to the
taxpayer under either Section 267 or 318 of the Internal Revenue
Code.
   (6) "Acquire" shall include any gift, inheritance, transfer
incident to divorce, or any other transfer, whether or not for
consideration.
   (7) (A) For taxable years beginning on or after January 1, 1997,
the term "new business" shall include any taxpayer that is engaged in
biopharmaceutical activities or other biotechnology activities that
are described in Codes 2833 to 2836, inclusive, of the Standard
Industrial Classification (SIC) Manual published by the United States
Office of Management and Budget, 1987 edition, and as further
amended, and that has not received regulatory approval for any
product from the United States Food and Drug Administration.
   (B) For purposes of this paragraph:
   (i) "Biopharmaceutical activities" means those activities which
use organisms or materials derived from organisms, and their
cellular, subcellular, or molecular components, in order to provide
pharmaceutical products for human or animal therapeutics and
diagnostics.  Biopharmaceutical activities make use of living
organisms to make commercial products, as opposed to pharmaceutical
activities which make use of chemical compounds to produce commercial
products.
   (ii) "Other biotechnology activities" means activities consisting
of the application of recombinant DNA technology to produce
commercial products, as well as activities regarding pharmaceutical
delivery systems designed to provide a measure of control over the
rate, duration, and site of pharmaceutical delivery.
   (g) In computing the modifications under Section 172(d)(2) of the
Internal Revenue Code, relating to capital gains and losses of
taxpayers other than corporations, the exclusion provided by Section
18152.5 shall not be allowed.
   (h) Notwithstanding any provisions of this section, a deduction
shall be allowed to a "qualified taxpayer" as provided in Sections
17276.1, 17276.2, 17276.4, 17276.5, and 17276.6.
   (i) The Franchise Tax Board may prescribe appropriate regulations
to carry out the purposes of this section, including any regulations
necessary to prevent the avoidance of the purposes of this section
through splitups, shell corporations, partnerships, tiered ownership
structures, or otherwise.
   (j) The Franchise Tax Board may reclassify any net operating loss
carryover determined under either paragraph (2) or (3) of subdivision
(b) as a net operating loss carryover under paragraph (1) of
subdivision (b) upon a showing that the reclassification is necessary
to prevent evasion of the purposes of this section.
   (k) Except as otherwise provided, the amendments made by the act
adding this subdivision shall apply to net operating losses for
taxable years beginning on or after January 1, 2000.
  SEC. 8.  Section 23609 of the Revenue and Taxation Code is amended
to read:
   23609.  For each income year beginning on or after January 1,
1987, there shall be allowed as a credit against the "tax" (as
defined by Section 23036) an amount determined in accordance with
Section 41 of the Internal Revenue Code, except as follows:
   (a) For each income year beginning before January 1, 1997, both of
the following modifications shall apply:
   (1) The reference to "20 percent" in Section 41(a)(1) of the
Internal Revenue Code is modified to read "8 percent."
   (2) The reference to "20 percent" in Section 41(a)(2) of the
Internal Revenue Code is modified to read "12 percent."
   (b) (1) For each income year beginning on or after January 1,
1997, and before January 1, 1999, both of the following modifications
shall apply:
   (A) The reference to "20 percent" in Section 41(a)(1) of the
Internal Revenue Code is modified to read "11 percent."
   (B) The reference to "20 percent" in Section 41(a)(2) of the
Internal Revenue Code is modified to read "24 percent."
   (2) For each income year beginning on or after January 1, 1999,
and before January 1, 2000, both of the following shall apply:
   (A) The reference to "20 percent" in Section 41(a)(1) of the
Internal Revenue Code is modified to read "12 percent."
   (B) The reference to "20 percent" in Section 41(a)(2) of the
Internal Revenue Code is modified to read "24 percent."
   (3) For each income year beginning on or after January 1, 2000,
both of the following shall apply:
   (A) The reference to "20 percent" in Section 41(a)(1) of the
Internal Revenue Code is modified to read "15 percent."
   (B) The reference to "20 percent" in Section 41(a)(2) of the
Internal Revenue Code is modified to read "24 percent."
   (c) (1) With respect to any expense paid or incurred after the
operative date of Section 6378, Section 41(b)(1) of the Internal
Revenue Code is modified to exclude from the definition of "qualified
research expense" any amount paid or incurred for tangible personal
property that is eligible for the exemption from sales or use tax
provided by Section 6378.
   (2) "Qualified research" and "basic research" shall include only
research conducted in California.
   (d) The provisions of Section 41(e)(7)(A) of the Internal Revenue
Code, shall be modified so that "basic research," for purposes of
this section, includes any basic or applied research including
scientific inquiry or original investigation for the advancement of
scientific or engineering knowledge or the improved effectiveness of
commercial products, except that the term does not include any of the
following:
   (1) Basic research conducted outside California.
   (2) Basic research in the social sciences, arts, or humanities.
   (3) Basic research for the purpose of improving a commercial
product if the improvements relate to style, taste, cosmetic, or
seasonal design factors.
   (4) Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral (including oil and gas).
   (e) (1) In the case of a taxpayer engaged in any biopharmaceutical
research activities that are described in codes 2833 to 2836,
inclusive, or any research activities that are described in codes
3826, 3829, or 3841 to 3845, inclusive, of the Standard Industrial
Classification (SIC) Manual published by the United States Office of
Management and Budget, 1987 edition, or any other biotechnology
research and development activities, the provisions of Section 41(e)
(6) of the Internal Revenue Code shall be modified to include both of
the following:
   (A) A qualified organization as described in Section 170(b)(1)(A)
(iii) of the Internal Revenue Code and owned by an institution of
higher education as described in Section 3304(f) of the Internal
Revenue Code.
   (B) A charitable research hospital owned by an organization that
is described in Section 501(c)(3) of the Internal Revenue Code, is
exempt from taxation under Section 501(a) of the Internal Revenue
Code, is not a private foundation, is designated a "specialized
laboratory cancer center," and has received Clinical Cancer Research
Center status from the National Cancer Institute.
   (2) For purposes of this subdivision:
   (A) "Biopharmaceutical research activities" means those activities
that use organisms or materials derived from organisms, and their
cellular, subcellular, or molecular components, in order to provide
pharmaceutical products for human or animal therapeutics and
diagnostics.  Biopharmaceutical activities make use of living
organisms to make commercial products, as opposed to pharmaceutical
activities that make use of chemical compounds to produce commercial
products.
   (B) "Other biotechnology research and development activities"
means research and development activities consisting of the
application of recombinant DNA technology to produce commercial
products, as well as research and development activities regarding
pharmaceutical delivery systems designed to provide a measure of
control over the rate, duration, and site of pharmaceutical delivery.

   (f) In the case where the credit allowed by this section exceeds
the "tax," the excess may be carried over to reduce the "tax" in the
following year, and succeeding years if necessary, until the credit
has been exhausted.
   (g) For each income year beginning on or after January 1, 1998,
the reference to "Section 501(a)" in Section 41(b)(3)(C) of the
Internal Revenue Code, relating to contract research expenses, is
modified to read "this part or Part 10 (commencing with Section
17001)."
   (h) (1) For each income year beginning on or after January 1,
1998, and before January 1, 2000:
   (A) The reference to "1.65 percent" in Section 41(c)(4)(A)(i) of
the Internal Revenue Code is modified to read "one and thirty-two
hundredths of one percent."
   (B) The reference to "2.2 percent" in Section 41(c)(4)(A)(ii) of
the Internal Revenue Code is modified to read "one and seventy-six
hundredths of one percent."
   (C) The reference to "2.75 percent" in Section 41(c)(4)(A)(iii) of
the Internal Revenue Code is modified to read "two and two-tenths of
one percent."
   (2) For each income year beginning on or after January 1, 2000:
   (A) The reference to "1.65 percent" in Section 41(c)(4)(A)(i) of
the Internal Revenue Code is modified to read "one and forty-nine
hundredths of one percent."
   (B) The reference to "2.2 percent" in Section 41(c)(4)(A)(ii) of
the Internal Revenue Code is modified to read "one and ninety-eight
hundredths of one percent."
   (C) The reference to "2.75 percent" in Section 41(c)(4)(A)(iii) of
the Internal Revenue Code is modified to read "two and forty-eight
hundredths of one percent."
   (3) Section 41(c)(4)(B) shall not apply and in lieu thereof an
election under Section 41(c)(4)(A) of the Internal Revenue Code may
be made for any income year of the taxpayer beginning on or after
January 1, 1998.  That election shall apply to the income year for
which made and all succeeding income years unless revoked with the
consent of the Franchise Tax Board.
   (4) Section 41(c)(6) of the Internal Revenue Code, relating to
gross receipts, is modified to take into account only those gross
receipts from the sale of property held primarily for sale to
customers in the ordinary course of the taxpayer's trade or business
that is delivered or shipped to a purchaser within this state,
regardless of f.o.b. point or any other condition of the sale.
   (i) Section 41(h) of the Internal Revenue Code, relating to
termination, shall not apply.
   (j) Section 41(g) of the Internal Revenue Code, relating to
special rule for passthrough of credit, is modified by each of the
following:
   (1) The last sentence shall not apply.
   (2) If the amount determined under Section 41(a) of the Internal
Revenue Code for any income year exceeds the limitation of Section 41
(g) of the Internal Revenue Code, that amount may be carried over to
other income years under the rules of subdivision (f), except that
the limitation of Section 41(g) of the Internal Revenue Code shall be
taken into account in each subsequent income year.
  SEC. 9.  Section 24416 of the Revenue and Taxation Code is amended
to read:
   24416.  Except as provided in Section 24416.1, 24416.2, 24416.4,
24416.5, or 24416.6, a net operating loss deduction shall be allowed
in computing net income under Section 24341 and shall be determined
in accordance with Section 172 of the Internal Revenue Code, except
as otherwise provided.
   (a) (1) Net operating losses attributable to income years
beginning before January 1, 1987, shall not be allowed.
   (2) A net operating loss shall not be carried forward to any
income year beginning before January 1, 1987.
   (b) (1) Except as provided in paragraphs (2) and (3), the
provisions of Section 172(b)(2) of the Internal Revenue Code,
relating to the amount of carryovers, shall be modified so that the
applicable percentage of the entire amount of the net operating loss
for any income year shall be eligible for carryover to any subsequent
income year.  For purposes of this subdivision, the applicable
percentage shall be:
   (A) Fifty percent for any income year beginning before January 1,
2000.
   (B) Fifty-five percent for any income year beginning on or after
January 1, 2000, and before January 1, 2002.
   (C) Sixty percent for any income year beginning on or after
January 1, 2002, and before January 1, 2004.
   (D) Sixty-five percent for any income year beginning on or after
January 1, 2004.
   (2) In the case of a taxpayer who has a net operating loss in any
income year beginning on or after January 1, 1994, and who operates a
new business during that income year, each of the following shall
apply to each loss incurred during the first three income years of
operating the new business:
   (A) If the net operating loss is equal to or less than the net
loss from the new business, 100 percent of the net operating loss
shall be carried forward as provided in subdivision (e).
   (B) If the net operating loss is greater than the net loss from
the new business, the net operating loss shall be carried over as
follows:

    (i) With respect to an amount equal to the net loss from the new
business, 100 percent of that amount shall be carried forward as
provided in subdivision (e).
   (ii) With respect to the portion of the net operating loss that
exceeds the net loss from the new business, the applicable percentage
of that amount shall be carried forward as provided in subdivision
(d).
   (C) For purposes of Section 172(b)(2) of the Internal Revenue
Code, the amount described in clause (ii) of subparagraph (B) shall
be absorbed before the amount described in clause (i) of subparagraph
(B).
   (3) In the case of a taxpayer who has a net operating loss in any
income year beginning on or after January 1, 1994, and who operates
an eligible small business during that income year, each of the
following shall apply:
   (A) If the net operating loss is equal to or less than the net
loss from the eligible small business, 100 percent of the net
operating loss shall be carried forward to the income years specified
in paragraph (1) of subdivision (e).
   (B) If the net operating loss is greater than the net loss from
the eligible small business, the net operating loss shall be carried
over as follows:
   (i) With respect to an amount equal to the net loss from the
eligible small business, 100 percent of that amount shall be carried
forward as provided in subdivision (e).
   (ii) With respect to that portion of the net operating loss that
exceeds the net loss from the eligible small business, the applicable
percentage of that amount shall be carried forward as provided in
subdivision (e).
   (C) For purposes of Section 172(b)(2) of the Internal Revenue
Code, the amount described in clause (ii) of subparagraph (B) shall
be absorbed before the amount described in clause (i) of subparagraph
(B).
   (4) In the case of a taxpayer who has a net operating loss in an
income year beginning on or after January 1, 1994, and who operates a
business that qualifies as both a new business and an eligible small
business under this section, that business shall be treated as a new
business for the first three income years of the new business.
   (5) In the case of a taxpayer who has a net operating loss in an
income year beginning on or after January 1, 1994, and who operates
more than one business, and more than one of those businesses
qualifies as either a new business or an eligible small business
under this section, paragraph (2) shall be applied first, except that
if there is any remaining portion of the net operating loss after
application of clause (i) of subparagraph (B) of paragraph (2),
paragraph (3) shall be applied to the remaining portion of the net
operating loss as though that remaining portion of the net operating
loss constituted the entire net operating loss.
   (6) For purposes of this section, "net loss" means the amount of
net loss after application of Sections 465 and 469 of the Internal
Revenue Code.
   (c) For any income year in which the taxpayer has in effect a
water's-edge election under Section 25110, the deduction of a net
operating loss carryover shall be denied to the extent that the net
operating loss carryover was determined by taking into account the
income and factors of an affiliated corporation in a combined report
whose income and apportionment factors would not have been taken into
account if a water's-edge election under Section 25110 had been in
effect for the income year in which the loss was incurred.
   (d) Net operating loss carrybacks shall not be allowed.
   (e) (1)  (A) For a net operating loss for any income year
beginning on or after January 1, 1987, and before January 1, 2000,
Section 172(b)(1)(A)(ii) of the Internal Revenue Code, relating to
years to which net operating losses may be carried, is modified to
substitute "five income years" in lieu of "20 years" except as
otherwise provided in paragraphs (2), (3), and (4).
   (B) For a net operating loss for any income year beginning on or
after January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal
Revenue Code, relating to years to which net operating losses may be
carried, is modified to substitute "10 income years" in lieu of "20
income years."
   (2) For any income year beginning before January 1, 2000, in the
case of a "new business," the "five income years" referred to in
paragraph (1) shall be modified to read as follows:
   (A) "Eight income years" for a net operating loss attributable to
the first income year of that new business.
   (B) "Seven income years" for a net operating loss attributable to
the second income year of that new business.
   (C) "Six income years" for a net operating loss attributable to
the third income year of that new business.
   (3) For any carryover of a net operating loss for which a
deduction is denied by Section 24416.3, the carryover period
specified in this subdivision shall be extended as follows:
   (A) By one year for a net operating loss attributable to income
years beginning in 1991.
   (B) By two years for a net operating loss attributable to income
years beginning prior to January 1, 1991.
   (4) The net operating loss attributable to income years beginning
on or after January 1, 1987, and before January 1, 1994, shall be a
net operating loss carryover to each of the 10 income years following
the year of the loss if it is incurred by a corporation that was
either of the following:
   (A) Under the jurisdiction of the court in a Title 11 or similar
case at any time prior to January 1, 1994.  The loss carryover
provided in the preceding sentence shall not apply to any loss
incurred in an income year after the income year during which the
corporation is no longer under the jurisdiction of the court in a
Title 11 or similar case.
   (B) In receipt of assets acquired in a transaction that qualifies
as a tax-free reorganization under Section 368(a)(1)(G) of the
Internal Revenue Code.
   (f) For purposes of this section:
   (1) "Eligible small business" means any trade or business that has
gross receipts, less returns and allowances, of less than one
million dollars ($1,000,000) during the income year.
   (2) Except as provided in subdivision (g), "new business" means
any trade or business activity that is first commenced in this state
on or after January 1, 1994.
   (3) "Title 11 or similar case" shall have the same meaning as in
Section 368(a)(3) of the Internal Revenue Code.
   (4) In the case of any trade or business activity conducted by a
partnership or an S corporation, paragraphs (1) and (2) shall be
applied to the partnership or S corporation.
   (g) For purposes of this section, in determining whether a trade
or business activity qualifies as a new business under paragraph (2)
of subdivision (e), the following rules shall apply:
   (1) In any case where a taxpayer purchases or otherwise acquires
all or any portion of the assets of an existing trade or business
(irrespective of the form of entity) that is doing business in this
state (within the meaning of Section 23101), the trade or business
thereafter conducted by the taxpayer (or any related person) shall
not be treated as a new business if the aggregate fair market value
of the acquired assets (including real, personal, tangible, and
intangible property) used by the taxpayer (or any related person) in
the conduct of its trade or business exceeds 20 percent of the
aggregate fair market value of the total assets of the trade or
business being conducted by the taxpayer (or any related person).
For purposes of this paragraph only, the following rules shall apply:

   (A) The determination of the relative fair market values of the
acquired assets and the total assets shall be made as of the last day
of the first income year in which the taxpayer (or any related
person) first uses any of the acquired trade or business assets in
its business activity.
   (B) Any acquired assets that constituted property described in
Section 1221(1) of the Internal Revenue Code in the hands of the
transferor shall not be treated as assets acquired from an existing
trade or business, unless those assets also constitute property
described in Section 1221(1) of the Internal Revenue Code in the
hands of the acquiring taxpayer (or related person).
   (2) In any case where a taxpayer (or any related person) is
engaged in one or more trade or business activities in this state, or
has been engaged in one or more trade or business activities in this
state within the preceding 36 months ("prior trade or business
activity"), and thereafter commences an additional trade or business
activity in this state, the additional trade or business activity
shall only be treated as a new business if the additional trade or
business activity is classified under a different division of the
Standard Industrial Classification (SIC) Manual published by the
United States Office of Management and Budget, 1987 edition, than are
any of the taxpayer's (or any related person's) current or prior
trade or business activities.
   (3) In any case where a taxpayer, including all related persons,
is engaged in trade or business activities wholly outside of this
state and the taxpayer first commences doing business in this state
(within the meaning of Section 23101) after December 31, 1993 (other
than by purchase or other acquisition described in paragraph (1)),
the trade or business activity shall be treated as a new business
under paragraph (2) of subdivision (e).
   (4) In any case where the legal form under which a trade or
business activity is being conducted is changed, the change in form
shall be disregarded and the determination of whether the trade or
business activity is a new business shall be made by treating the
taxpayer as having purchased or otherwise acquired all or any portion
of the assets of an existing trade or business under the rules of
paragraph (1) of this subdivision.
   (5) "Related person" shall mean any person that is related to the
taxpayer under either Section 267 or 318 of the Internal Revenue
Code.
   (6) "Acquire" shall include any transfer, whether or not for
consideration.
   (7) (A) For income years beginning on or after January 1, 1997,
the term "new business" shall include any taxpayer that is engaged in
biopharmaceutical activities or other biotechnology activities that
are described in Codes 2833 to 2836, inclusive, of the Standard
Industrial Classification (SIC) Manual published by the United States
Office of Management and Budget, 1987 edition, and as further
amended, and that has not received regulatory approval for any
product from the United States Food and Drug Administration.
   (B) For purposes of this paragraph:
   (i) "Biopharmaceutical activities" means those activities which
use organisms or materials derived from organisms, and their
cellular, subcellular, or molecular components, in order to provide
pharmaceutical products for human or animal therapeutics and
diagnostics.  Biopharmaceutical activities make use of living
organisms to make commercial products, as opposed to pharmaceutical
activities which make use of chemical compounds to produce commercial
products.
   (ii) "Other biotechnology activities" means activities consisting
of the application of recombinant DNA technology to produce
commercial products, as well as activities regarding pharmaceutical
delivery systems designed to provide a measure of control over the
rate, duration, and site of pharmaceutical delivery.
   (h) For purposes of corporations whose net income is determined
under Chapter 17 (commencing with Section 25101), Section 25108 shall
apply to each of the following:
   (1) The amount of net operating loss incurred in any income year
which may be carried forward to another income year.
   (2) The amount of any loss carry forward which may be deducted in
any income year.
   (i) The provisions of Section 172(b)(1)(D) of the Internal Revenue
Code, relating to bad debt losses of commercial banks, shall not be
applicable.
   (j) The Franchise Tax Board may prescribe appropriate regulations
to carry out the purposes of this section, including any regulations
necessary to prevent the avoidance of the purposes of this section
through splitups, shell corporations, partnerships, tiered ownership
structures, or otherwise.
   (k) The Franchise Tax Board may reclassify any net operating loss
carryover determined under either paragraph (2) or (3) of subdivision
(b) as a net operating loss carryover under paragraph (1) of
subdivision (b) upon a showing that the reclassification is necessary
to prevent evasion of the purposes of this section.
   (l) Except as otherwise provided, the amendments made by the act
adding this subdivision shall apply to net operating losses for
income years beginning on or after January 1, 2000.
  SEC. 10.  The amendments made by this act to Section 10754.2 of the
Revenue and Taxation Code, and the addition by this act of Section
10903 to the Revenue and Taxation Code, shall become operative only
if AB 858 of the 1999-2000 Regular Session is enacted, in which case
the amendments made by this act to Section 10754.2 of the Revenue and
Taxation Code, and the addition by this act of Section 10903 to the
Revenue and Taxation Code, shall become operative on the effective
date of this act.
  SEC. 11.  This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.
